(November 2009) Regulators are in the unenviable position of determining an allowance for ROE that’s fair to consumers and investors in a volatile economy. The cases that stand out this...
The Coming Conflict
Predicting discord in power plant property tax assessments.
One of the best means by which to predict future conflict is to look for two parties moving in fundamentally opposite directions. There exists such a situation in many areas of the United States when it comes to tax assessment of power generating real property. Indeed, a perfect storm might be brewing.
At a time when many states and municipalities are facing budget deficits of historic proportions, many power generators are struggling against declining demand, the lowest electricity prices in many years, and looming carbon legislation. As a result, tax authorities might be seeking to raise property tax receipts at the exact same time that many generators are looking to lower their assessments.
Conflict appears to be on the horizon, but where will it emerge? An examination of state budgets, as well as the expected changes in generator gross margins, reveals how tax collectors and taxpayers are most likely to respond.
Continued Fiscal Deficits
In March 2006, just four years ago, nearly every state reported good or stable fiscal conditions to the National Conference of State Legislators (NCSL). 1 These reports quickly were reversed under the current recession. Today, nearly every state faces a budget gap, and both the breadths and sizes of these gaps are unprecedented (see Figure 1) . According to the July 2009 NCSL update, state lawmakers closed a cumulative budget gap of approximately $110 billion for the 2009 fiscal year. 2
Balancing budgets will become tougher in the coming years, as fiscal conditions likely will worsen before they improve. According to the NCSL, states are expected to face budget gaps of over $140 billion for the 2010 fiscal year—an estimate that has been revised progressively higher over the last few months. Budget analyses suggest that the cumulative gap through 2012 will be significantly larger than occurred in the fiscal crisis between 2001 and 2004, when states largely relied on spending cuts, rainy day funds, and tax increases to close gaps.
Preliminary steps taken to bridge current budget gaps have focused mostly on reduced spending, though rainy day funds also are utilized where available. Many have relied on the American Recovery and Reinvestment Act of 2009. But what happens when stimulus funds are fully disbursed? Using recent history as a guide, if fiscal conditions remain severe, lawmakers might have limited options beyond increasing tax revenues.
Income and sales tax rates are the main revenue dials at the state level, but property tax rates are the primary tool for counties, municipalities, and school boards. Electric generators are some of the largest single taxpayers in certain localities and their property tax bills might grow higher in the next few years. But generators don’t lie entirely at the mercy of the